Small to medium-sized businesses in the Netherlands are beingrefused financing by banks, and they are turning to the country'snascent credit union movement for member business loans.

The problem is that few, if any, credit unions are currentlylicensed, creating significant economic void in helping theEuropean Union member country grow its economy.

Despite the lack of member institutions, however, two creditunion trade groups are working with the country's political andeconomic leaders to urge credit union formation and licensuresolely for business lending purposes.

The decline in bank financing first emerged four years ago whenthe ongoing financial crisis caused banks to reduce their lendingto small businesses, according to Roland Lampe, head of financialconsulting firm Lampe & Associates and working on behalf of theAssociation of Credit Unions of the Netherlands.

Banks claim that business loans for amounts of less than 250,000euros cost 4,000 euros each to administer, an amount too costly tojustify in the face of minimal returns. By declining the loans,banks have been leaving the country's small and medium-sizedbusinesses with limited access to capital.

Only Qredits, a Netherlands-based microfinance organization, hasbeen offering small business loans, and then only to a 50,000 eurosmaximum. The agency currently has 80 million euros in outstandingbusiness loans, with an average loan of just 17,500 euros. Thesmall amount illustrates just how wide an economic gap thecountry's small-to-medium-sized enterprises face.

Lampe estimates that small and medium-sized enterprises accountfor some 864,000 enterprises and constitutes almost 99% of allbusinesses in the Netherlands. ACUN is one of two organizations topromote the formation of credit unions as a solution to fill thecapitalization gap. However, the credit union approval process hasbeen slow despite the banking industry's reluctance to serve themarket, something with which the competing credit union trade groupagreed.

“The loans are expensive for banks because the administrativehandling and risk provision required for loans by the banking lawsmake additional costs too high to be carried by the revenue fromsmall loans,” said Georgina Friederichs, director of theAssociation of Cooperating Credit Unions, an ACUN competitor formedin March 2013. “Furthermore, the bank's research and handling costsare the same as for a large loan, but the revenue is smaller andnot attractive for banks.”

Read more: A potential 3.5B euros market per year…

Friederichs estimates that 46% of all Netherlands entrepreneursfall into the funding gap that looms between bank financing andmicroloan capabilities. Specifically, small enterprises needed anestimated 4.5 billion euros in 2012, of which 42% was refused bybanks, she said. Medium-sized enterprises need 6.5 billion euros,of which 26% was refused.

“This creates a potential 3.5 billion euros market per year forcredit unions,” Friederichs said. Despite that – or perhaps becauseof it – banks in the Netherlands do not support credit unionformation, she added.

The World Council of Credit Unions, the international tradeassociation based in Madison, Wis., has been providing assistanceto the Netherlands credit union movement and input to governmentofficials, but no comprehensive credit union regulatory structurehas yet been developed, according to Michael Edwards, World Councilvice president and chief counsel.

At issue for Netherlands credit unions under the currentregulations is the need for a banking license to operate, and underBasel III's capital requirements directive CRD IV a minimum of 5million euros on deposit to open their doors. But there is aEuropean Union member-state option under the Basel rule that canexempt credit unions from the capital requirement if the memberstate creates a credit union rulebook that defines operations atthe national level, Edwards said.

“It's hard to reach a minimum 5 million euros in initial capitalbecause a new credit union starts with no retained earnings,”Edwards explained. “The requirements of full CRD IV/Basel IIIcompliance are both very expensive and overkill for a small creditunion that only does savings and loans.”

In addition to capital concerns, staff capability and expertiseissues come into play when business loans are concern, Edwardssaid.

“The main safety and soundness concern for business-lendingcredit unions such as those in the Netherlands is whether thecredit unions have personnel with business lending experience,”said Edwards, “either on staff or as a consultant, in order toensure strong underwriting practices.”

Read more: Problems with regulators, too…

But greater issues exist for the Netherland's nascent movementbefore staff expertise can be measured. The country's Central Bankis wary of approving alternate banking structures due to past badexperiences with other models, Lampe said. After three years oflobbying, the Central Bank allowed credit unions to issue“perpetual” member certificates as a way to develop funding thatwould allow them to open. The only other option, Lampe said, wasfor credit unions to apply for a formal banking license.

“This is rather absurd for a beginning credit union with 2.5million euros in assets and 1.5 FTEs on the payroll,” Lampe said.“In my opinion it is ethically not right to ask entrepreneurs toperpetually dispose of their savings money.”

Instead, Lampe worked with MP Eddy van Hijum of the ChristianDemocratic Party who, in turn, drafted a proposal to reviseregulations that would more easily enable the formation of creditunions. The legislation, issued in July and discussed in November,will be put to a vote with the goal of clearing the path for thewidespread formation of credit unions by late 2014.

Currently, there are 104 credit union applications pending,Lampe said. What's more, two credit unions are expected to opentheir doors next month, one to serve automotive workers and otherto provide business loans to small entrepreneurs in the province ofZeeland.

The Netherlands' pending initiatives echo an earlier time in theU.S. credit union movement, when credit unions granted loans tosupport their members by supporting their members' business, saidEdwards.

“Many early U.S. credit unions were chartered specifically forbusiness lending, such as providing agricultural loans or loans totradesmen for the purchase tools and other business equipment,”said Edwards. “The 12.25% business cap imposed on most U.S. creditunions in 1998 as part of the (Credit Union Membership Access Act)has led many people to believe that credit unions are supposed tobe primarily for consumer lending, but the history of credit unionsin the U.S. is fully consistent with small business lending.”